Dollar drops as trade gap exceeds forecasts

The Canadian dollar sank to a three- year low after the nation’s November trade deficit swelled to nine times what economists forecast, throwing doubt on the pickup in exports the Bank of Canada has said will fuel growth.

The currency fell versus all of its 16 major peers as a previously reported trade surplus in October was revised to a deficit, meaning the nation has had 23 consecutive trade gaps through November. The U.S. trade deficit shrank to a four-year low as imports of oil, Canada’s largest export, slid to the lowest level in three years. The currency fell after a Canadian purchasing-manager index unexpectedly dropped.

“It’s tacit acceptance by the Bank of Canada as well as the finance minister with respect to a weaker Canadian dollar to offset the terms of trade,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, by phone from Toronto. “The competitive devaluation model, which has been adopted by other central banks globally — Canada can now be added to the list.”

The loonie depreciated 0.9 percent to C$1.0750 per U.S. dollar at 1:57 p.m. in Toronto. It reached C$1.0762, the weakest since May 2010. One Canadian dollar buys 93.02 U.S. cents.

Canada’s benchmark 10-year government bond rose for a second day, pushing the yield down three basis points, or 0.03 percentage point, to 2.69 percent, the lowest level since Dec. 24. The price of the 1.5 percent security maturing in June 2023 added 23 cents to C$90.24.

Trade Gaps

The nation’s merchandise trade deficit widened to C$940 million ($879 million) from a C$908 million deficit in October that was revised from a C$75 million surplus in a report today from Ottawa. The median estimate of economists surveyed by Bloomberg called for a C$100 million deficit in November.

The U.S. trade gap narrowed 12.9 percent to $34.3 billion, smaller than projected by any economist surveyed by Bloomberg and the least since October 2009, figures from the Commerce Department showed today in Washington. America is Canada’s biggest trade partner.

“It just confirms what we already know — that the Canadian economy is weaker than some of its Group of Seven competition,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC, by phone from New York. “It more or less confirms the story of a Canadian economy that will be relatively lackluster.”

Ivey Index

The loonie extended losses as Canada’s Ivey purchasing- manager index fell to 46.3 in December on a seasonally adjusted basis, following a November reading of 53.7, according to a statement on the website of Western University’s business school. Economists in a Bloomberg survey forecast an advance to 54.5. Readings of more than 50 indicate purchasing by governments and companies advanced.

Bank Canada Governor Stephen Poloz said in an interview last month exports have been disappointing through a period when the Canadian dollar weakened and the U.S. economy accelerated.

Poloz said at a press conference Dec. 12 that the benchmark interest-rate target may remain unchanged at 1 percent for “quite some time” as the central bank focuses on the threat of persistently low inflation. In his October policy statement, he dropped language that had been put in place by his predecessor about the need for a future rate increase.

Flaherty Comments

“It just underlines the fact that the bank is mindful of wanting to encourage a degree of competitiveness via the currency,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, by phone from London. “You look at the two trade reports, the U.S. and Canada, and one disappointed and the other was a positive surprise.”

The loonie declined yesterday after Finance Minister Jim Flaherty said in an interview broadcast Jan. 5 that a weaker currency helps the country’s manufacturers and that Poloz had told policy makers the loonie could weaken.

The Canadian dollar fell the most today among 10 developed- nation currencies tracked by the Bloomberg Correlation Weighted Index, declining 0.7 percent. The U.S. dollar strengthened 0.2 percent.